THE DIFFERENTIAL ASSOCIATION OF FORECAST ERROR AND EARNINGS VARIABILITY WITH SYSTEMATIC RISK

A procedure was developed to test for a difference in association of earnings forecast errors and historic earnings variability with systematic risk. Several previous studies have associated operating risk with accounting earnings variability and earnings forecast errors. In the study, actual and forecasts of earnings per share data for 100 New York Stock Exchange (NYSE) companies over the period 1967-1972 were analyzed. The forecasting error in per cent and the earnings variability as defined by the coefficient of variation were established. The beta factor for each was identified as the systematic risk.Analysis of the data shows that there exists a better correlation between the beta factor and forecasting error than between the beta factor and earnings variability. Correlation coefficient differences were most significant with those companies that had a high divergence between actual and forecast earnings. The results show that earnings variability is not the same as risk. This tends to support the concept of market efficiency.